Canadian Mortgages: Key Rules
The Canadian housing market has strict regulations regarding down payments, insurance, and stress tests.
CMHC Insurance (Default Insurance)
If your down payment is less than 20% of the home price, you are legally required to purchase mortgage default insurance. This protects the lender, not you. It is provided by CMHC, Sagen, or Canada Guaranty.
- 5% Down: 4.00% Premium.
- 10% Down: 3.10% Premium.
- 15% Down: 2.80% Premium.
- 20% Down: 0% Premium (Conventional Mortgage).
- The premium is added to your mortgage balance, so you pay interest on it.
The Mortgage Stress Test (B-20)
Even if you get pre-approved for 5%, you must prove you can afford payments at a higher rate. Lenders must qualify you at:
- The Benchmark Rate (currently 5.25%) OR
- Your Contract Rate + 2.00%
Whichever is higher. This reduces your buying power significantly but prevents mass defaults if rates rise.
Amortization Limits
- Insured ( <20% Down): Max 25 years.
- Uninsured ( >20% Down): Max 30 years (sometimes 35 with alternative lenders).
First-Time Home Buyer Incentive
The government offers a shared equity program where they lend you 5% or 10% of the purchase price to lower your monthly payments. In exchange, they own that % of your home's equity (profit or loss) when you sell.
Buying Pre-Construction (Pre-Sales)
In Canada, buying a condo before it's built is popular. You pay the deposit in installments (e.g., 5% every 6 months). Be careful: If the value drops by the time it's built, the bank won't lend you the full amount, and you must cover the gap.
GST/HST New Housing Rebate
If you buy a BRAND NEW home (or build one), you must pay GST/HST on the price. However, if the home is under $450,000, you can get a partial rebate of the tax paid. This does not apply to re-sale homes (used homes), which are tax-exempt.
FAQs
- Is interest tax-deductible?
- In Canada, mortgage interest on your primary residence is NOT tax-deductible (unlike the US). It is only deductible for investment properties.
- What is a semi-annual compounding?
- Canadian law requires fixed-rate mortgages to compound semi-annually, not monthly. This makes the "Effective Rate" slightly lower than US mortgages with the same face rate.
- What is the Land Transfer Tax?
- Most provinces charge a tax when you buy property (0.5% - 2.0%). Toronto has an *additional* municipal tax, effectively doubling the cost to ~4%.
- Amortization vs Term?
- Amortization is the total life of the loan (e.g., 25 years). Term is the length of your current contract rate (e.g., 5 years). You renew your term 5 times to finish the amortization.